Posts Tagged ‘Phil Hodgen’

Not farming isn’t farming. That is one way to look at Friday’s decision by the Eighth Circuit in Morehouse that Conservation Reserve Program payments to non-farmers are not self-employment income. Overturning a Tax Court decision, a split three-judge panel rejected the IRS assessment of self-employment tax on landowners who enrolled in the CRP when they were not engaged in the trade or business of farming. The appeals panel said the CRP payments to hold erodable land out of production are instead rental payments with respect to non-farmers; real estate rental income is not subject to self-employment tax.

Now, the Eighth Circuit’s reversal of the Tax Court means that non-farmers do not have to pay self-employment tax on CRP payments. That’s the case at least within the Eighth Circuit. Active Farmers still have to pay on CRP payments unless the 2008 Farm Bill provision applies to them. But, non-farmers and non-materially participating farm landlords are given relief within the Eighth Circuit. For CRP rents paid after 2007, the question is whether the recipient is a materially-participating farmer.

The “2008 Farm Bill provision” holds that CRP payments are not self-employment income for recipients receiving Social Security payments.

In Iowa, taxpayers might want to think twice before taking their CRP payments out of self-employment income. Iowa has a special exclusion of capital gain income for taxpayers who have held land for ten years and who have also “materially participated” in a business with the land for ten years. The Iowa Department or Revenue in a recently-released decision said that it would consider a taxpayer to be “materially participating” in CRP ground if self-employment tax were paid. Given how much appreciation there has been on farm ground in recent years, paying a little self-employment tax might be worth it to avoid Iowa tax on a big farm sale gain.

Making crashes more likely, for your safety. The Chicago Tribune reports that Chicago shortened yellow light times to increase red-light camera revenues. As Brian Gongolnotes, this demolishes the argument that the cameras are for safety, rather than revenue: “It’s quite simple: If you want to cut down on red-light running and consequent crashes, you lengthen yellow lights and increase the gap between the red in one direction and the onset of green in the other.”

Our local politicians never seemed very concerned about dangerous intersections until they found a way to make money off of them. Nor did they experiment with non-revenue safety options, like longer yellow cycles and a delay between the red one way and the green light the other, before turning on the revenue cameras.

It is almost October 15th. October 15 is the extended due date of your federal individual tax return. If, like me, you still have not filed it and you are planning, unlike me, to paper file, use certified mail and save the return card when it comes back – especially if you owe money.

I e-file, myself, but if you are filing to claim a refund on a 2010 extended return, paper filing may be your only option — and then you absolutely should go certified mail, return receipt requested.

Daniel Shaviro, Frontiers of quasi-tax fraud. “Because (a) partnership tax rules are so complex that only a handful of people really understand them – perhaps a thousand across the entire country? – and (b) people at the IRS generally don’t understand them, and (c) the audit rate for partnership tax returns is below 1%, compliance with partnership tax rules that are meant to block abusive tax planning that contradicts the actual tenor of the rules has pretty much completely collapsed.”

For a family of five, the penalty could be as high as $12,240 for the 2014 tax year, experts say. And for many people, the penalty will rise sharply in 2015 and 2016.

The massive health-care changes passed in 2010 are phasing in, and this is the first year most Americans must have approved health insurance. Those who don’t will owe a penalty under the Individual Shared Responsibility Provision. It’s due with your income taxes, payable by April 15, 2015.

For your own good, of course. And even if you get the coverage, you can get surprised by a tax bill at year-end if you mis-estimated your income for the year. (Via the TaxProf).

Beamed up. When Congresscritters are called “colorful,” it implies they are harmless and almost cute. James Traficant was often described as a “colorful” Congresscritter. He would give speeches with the tag line “beam me up.” Russ Fox reports that his request has been granted; the former Congressman died last week.

His colorful career came to a bad end with seven years in prison for tax evasion and other charges. He was accused of accepting bribes and not paying taxes as a sheriff before he made it to Congress; his defense was that he was conducting a secret undercover investigation of the bribe-givers. He was convicted and expelled from the House. You have to achieve a pretty high standard of low to be expelled from that wretched hive of scum and villainy.

As his release date neared, a minor league baseball team prepared to celebrate with a “Traficant Release Night” promotion, until they got cold feet and cancelled.

It’s fun to laugh at these antics, and it’s healthy to mock politicians. Yet even an ineffective Congresscritter wields an enormous amount of power, with a 1/535 say in a trillion-dollar federal budget. The real laugh is on the taxpayers who put such power in such hands.

There is one major issue with the law that I see: Most tax software today does not allow for electronic filing of a single-member LLC return (a disregarded entity). While there is no federal return for such an entity, California does require the return to be filed (and an $800 annual fee be paid). California also does not have its own online system to e-file business returns. My software currently does not have the ability to e-file a California single-member LLC return. I’ll be asking my software provider about this…but not until after October 15th.

The U.S. tax code only accounts for capital income (capital gains, specifically) when it is realized. This means that someone may have been accumulating capital gains for 40 years in an investment portfolio, but the IRS only sees the final (sometimes massive) realization. Suppose an individual invested in stock. Each year, the gains were small, but in the 41st year, he realized all of the past years’ gains and earned $1 million in income. IRS data would show that this taxpayer was a millionaire one year (and part of the 1 percent).

You might think that a secretary is a secretary and a janitor is a janitor. Not so, they vary quite a bit in competence. Goldman Sachs has much more to lose from an incompetent secretary than does a small accounting firm in Des Moines.

I prefer to think that our “small accounting firm in Des Moines” doesn’t have to pay as much as Goldman Sachs because people here don’t have to work with people from Goldman Sachs.

If you can’t get a tenant in 30 years, maybe you’re doing something wrong. A Minnesota architect named Meinhardt bought a farmstead in 1976. He rented out the cropland to neighboring farmers. He looked for a tenant for the farmhouse, too. He was still looking in 2007, but never managed to find a cash-rent tenant for the house.

Though he never reported any rental income on the house, he paid for house expenses, including repairs, insurance supplies and utilities, deducting them on Schedule E on a joint return. The deductions totaled $42,694 from 2005 through 2007.

The IRS decided that the architect failed to demonstrate enough of a profit motive to take the deductions. The taxpayer argued that the expenses were actually part of renting the farmland, which the IRS agreed was a for-profit enterprise. The taxpayer also argued that he really tried to rent the house, but it just didn’t work out.

The Tax Court sided with the IRS, and now so has the Eighth Circuit. First addressing the argument that the house expenses should be lumped in with the land rental:

They offered no evidence they ever tried to rent or lease the farmhouse and farmland together. Donald testified the farmhouse could be parceled off and sold separately from the crop and pasture land. The Tax Court did not clearly err in finding that the Meinhardts treated the farmhouse separately from the leased farmland, which was admittedly a business activity, and therefore expenses related solely to the farmhouse could not be deducted as ordinary and necessary expenses of the leased farmland activity.

The hard-luck landlord defense didn’t fare any better:

The Tax Court found that the Meinhardts did not prove the farmhouse was held for the production of income during the tax years in question because they “did nothing to generate revenue during the years in issue [and] had no credible plan for operating it profitably in the future. There was no affirmative act (renting or holding for appreciation in value) to demonstrate that the property was held for the production of income.” (T.C. Memo. citations omitted.) This finding, too, was not clearly erroneous. Without question, the Meinhardts’ expenditures for substantial repair and improvement of the farmhouse over many years, including the tax years in question, increased the value of that property. But they failed to prove that they were holding and improving the property to profit from its rental or its appreciation, as opposed to improving it for personal use.

The clincher:

The reasonableness of this alternative personal-use explanation for the expenditures in 2005-2007 was rather dramatically confirmed when they sold their home in suburban Minneapolis and moved into the farmhouse in 2010.

Oops.

The Moral? If you hold property for years without generating income, you better have pretty good evidence that you have worked hard to rent it if you want to deduct the costs on your Schedule E. If it’s a rental home that you also use on weekends, you’ll have to work harder. If you hold it for 30 years without a cash tenant and then move in, your battle to convince a judge of your profit motive might be hopeless.

William Perez, Repaying the First-Time Homebuyer Tax Credit. The first misbegotten version of the misbegotten First-Time Homebuyer Credit was actually more a loan than a credit, and it must be repaid over 15 years. Some of them will be repaying long after the home was sold, or foreclosed

Howard Gleckman, Congress Cries Wolf Over Internet Access Taxes (TaxVox). “Unable to do anything important before its election season recess, Congress is about to knock down a favorite digital straw man—It will extend for a few months the about-to-expire federal ban on state taxation of Internet access.”

Thankfully, the Tax Court did draw a distinction between the taxability of “Thank You Points” and frequent flyer miles attributable to business or official travel using Announcement 2002-18 (linked above), wherein the IRS made clear that they would not tax frequent flyer miles attributable to business travel. But that’s where the good news for taxpayers stopped.

TaxGrrrl thinks its a bad result:

In a case of what could be characterized as bad facts making bad law, taxpayers didn’t put up much of an argument for not including the income on the tax return: there was no lengthy brief explaining why it might be excludable. Nor did the IRS say much about the inclusion: they more or less took the position that Citibank’s form was enough to prove income, saying “we give more weight to Citibank’s records.”

The Tax Court made this a “reported” decision, which signals that they will side for the IRS in taxing miles that show up on 1099 information returns.

The tax law certainly allows non-cash transactions to be taxable. If they didn’t, barter exchanges would rule the world. It’s also true that at some point trying to tax everything of value doesn’t make sense. You might value the smile from the cute barista on the skywalk, but that doesn’t mean you should pay tax on the extra value received with your coffee. The hard part now is knowing when you cross the line.

As of January 1, 2014, a number of long-time options became illegal under the ACA. Lest employers are tempted to ignore this issue, they should know that offering noncompliant plans subjects them to a possible excise tax of $100 per day per employee per violation. ACA violations are no small matter.

…

In IRS Notice 2013-54, issued last fall, the Treasury Department and the Department of Labor made clear that such plans are no longer allowed. This prohibition applies to a number of long-used standalone health care reimbursement plans that are not integrated with an ACA-compliant group health care plan. Although some exceptions apply, the ACA has made the following types of reimbursement plans illegal (subjecting their sponsors to the possible $100/day/employee/violation penalty tax):

If you think that you don’t have to worry about Obamacare because you don’t have 50 employees, think again.

Roger McEowen, Structuring the Business: S Corporation or LLC?. “But, beyond the requirement to pay reasonable compensation, the S classification provides a means for extracting money out of the business without paying employment taxes – there isn’t any employment tax on distributions (dividends) from the S corporation.”

Is it okay to show the purchase as a miscellaneous deduction if the amount is less than 2% of their income and thus isn’t deductible anyway?That way, the taxpayer sees it on their tax return but technically the government hasn’t been harmed because the amount was too small to actually be deducted. Is this okay?

This can be tempting for a practitioner. You can “take” a deduction for “subscriptions” that are probably Sports Illustrated and appease a pushy taxpayer without actually reducing taxes. But Jason makes good points as to why it can make it hard to stop taxpayers from pushing for bogus deductions that actually matter.

A lawyer in the IRS ethics office is facing the possibility of being disbarred, according to records that accuse her of lying to a court-appointed board and hiding what she’d done with money from a settlement that was supposed to go to two medical providers who had treated her client.

Of course, given Commissioner Koskinen’s policy of stonewalling and evasion, she might be just the woman he wants for the job. (Via TaxProf)

You shouldn’t assume that the lower rate caused the revenue increases. Still, when our current rates clearly incentivize tax-saving moves like inversions, you shouldn’t assume rate cuts will be big revenue losers, either. The revenue-maximizing rate has to be influenced by rates charged in other jurisdictions.

Cara Griffith,Is the Dormant Commerce Clause in Jeopardy? (Tax Analysts Blog) “In matters of state taxation, the dormant commerce clause provides a much stronger defense against discriminatory taxation than the due process clause.”

The Big Tax News while I was on vacation was the Halbig decision by the U.S. Court of Appeals for the D.C. Circuit. The decision holds invalid the IRS decision allowing tax credit subsidies for policies purchased on federal insurance exchanges. The impact of the decision was offset by a Fourth Circuit decision the same day coming to the opposite conclusion, but it is still a big deal, especially in light of some subsequent events.

The D.C. circuit has national implications because every taxpayer can come under its jurisdiction by litigating through the Court of Federal Claims. An alert reader corrects me:

Your post today contains an error. The D.C. circuit is not the same as the federal circuit. The court of federal claims is appealable to the federal circuit. The district court for the D.C. circuit is appealable to the D.C. circuit. Halbig is a big deal in any event because the dc circuit instructed the district court to vacate the rule. Vacated means that there is no rule anywhere. In any event, SCOTUS will make the final call here.

As long as that decision stands — and the IRS will certainly ask the 15-member court to reconsider Halbig, decided by a three-member panel — it threatens not only the tax credits for the 37 states without their own exchanges, but it also invalidates the employer mandate tax in those states and takes much of the bite out of the individual mandate. The South Carolina Policy Council explains why (my emphasis):

The subsidies are also important for their function as triggers of both the individual and employer mandate portions of the ACA. The ACA imposes a $2,000 per employee penalty for companies with more than 50 employees who do not offer “adequate health insurance” to their workers. This penalty is triggered when an employee accepts an IRS subsidy on a plan purchased through an exchange. If individuals in the 36 states without a state-run exchange are ineligible for subsidies, there will be no trigger to set off the employer mandate.

An absence of subsidies would also allow many people to avoid the ACA’s individual mandate, which requires citizens to maintain health insurance covering certain minimum benefits or pay a fine. This is because the ACA exempts citizens from the individual mandate whose out-of-pocket costs for health insurance exceed 8 percent of their household income. If IRS subsidies are removed, insurance plans offered on exchanges would exceed this cost threshold for many people – thereby providing them an exemption from the mandate.

Flickr image courtesy Tim under Creative Commons license

This would devastate the already shaky economics of Obamacare.

The key ruling in Halbig is its finding that statutory language allowing tax credits through exchanges “established by a State” doesn’t cover the federal exchanges that are used in the 36 states without exchanges. Critics of Halbig say that Congress couldn’t have been that stupid. For example, Jonathan Gruber, an architect of the ACA, says ““Literally every single person involved in the crafting of this law has said that it`s a typo, that they had no intention of excluding the federal states.”

That assertion has been challenged by a number of observers, notesMegan McArdle. She cites a January 2012 speech by one Jonathan Gruber, an architect of the ACA:

Only about 10 states have really moved forward aggressively on setting up their exchanges. A number of states have even turned down millions of dollars in federal government grants as a statement of some sort — they don’t support health care reform.

Now, I guess I’m enough of a believer in democracy to think that when the voters in states see that by not setting up an exchange the politicians of a state are costing state residents hundreds and millions and billions of dollars, that they’ll eventually throw the guys out. But I don’t know that for sure. And that is really the ultimate threat, is, will people understand that, gee, if your governor doesn’t set up an exchange, you’re losing hundreds of millions of dollars of tax credits to be delivered to your citizens. [emphasis added]

The 2012 Jonathan Gruber repeated the story that only state-established exchanges qualify for credits in other forums. It’s remarkable that two ACA architects named Jonathan Gruber have such divergent views of what the bill does. It’s even more remarkable that they are the same guy. This seems like strong support for the D.C. Circuit’s approach.

If the ACA were just another tax bill, it would be pretty easy to predict that the Supreme Court would go with the D.C. Circuit’s approach, based on prior rulings involving statutes that reached results the IRS didn’t care for. In the Gitlitzcase, which arguably provided an unintended windfall for S corporation shareholders when the S corporation incurred non-taxable debt forgiveness income, the Supreme Court said in an 8-1 decision (footnotes and citations omitted, emphasis added):

Second, courts have discussed the policy concern that, if shareholders were permitted to pass through the discharge of indebtedness before reducing any tax attributes, the shareholders would wrongly experience a “double windfall”: They would be exempted from paying taxes on the full amount of the discharge of indebtedness, and they would be able to increase basis and deduct their previously suspended losses. Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.

In other words, if Congress doesn’t like what it has done, it’s up to Congress to fix it, not the IRS. Congress did just that with the Gitlitz result within a year of the decision.

Of course, the ACA isn’t typical tax legislation. Chief Justice Roberts tied himself in knots to find a way to uphold Obamacare in 2012. Politics makes it unlikely that the Gitlitz approach will be followed by the left side of the Supreme Court, and who knows how Justice Roberts will rule. But it does appear at least possible that Halbig will be upheld.

What should taxpayers do? My thought is to assume the mandates remain in effect and pay tax (or reduce your withholding) accordingly. Then be prepared to file a refund claim if Halbig is upheld by the Supreme Court. Plan for the worst and hope for the best.

Jason Dinesen, Don’t Be “That” Business Owner. “I see too many with preconceived notions of what they can “get by with.” I’ve seen and read about too many people whose life got turned upside-down when they ended up NOT “getting by with it” after all.”

Russ Fox, 2:42. “That’s how long I spent on hold on the IRS Practitioner Priority Service (PPS) yesterday–two hours, forty-two minutes.” It’s a good thing Practitioners are a “Priority,” or who knows how long he’d have been on hold.

Peter Reilly wonders if it is Time To Let Kent Hovind Go Home? Peter thinks the former owner of a theme park based on the idea that hominids and dinosaurs co-existed may have suffered enough for his tax misdeeds.

States do not (and should not) do a lot of redistributing to the very poor.

When states jack up taxes on the “rich,” the money doesn’t exactly go to people sleeping under bridges, as David explains (my emphasis):

I have written about this before. I noted that “the real beneficiaries of most government spending, certainly at the state level, never come up. No one ever says that we need higher taxes because my friends in the construction business want new contracts. No one ever says that they want new taxes to expand bloated public employee union bureaucracies. Yes, crony capitalism and union bosses drive most calls for higher taxes.” My right-wing friends often criticize liberals calling for higher marginal taxes as delusional. But they know exactly what they’re doing. Often they want higher taxes just so they can give money to their friends.

The money taken from “the rich” goes to the well-connected. Iowa’s highest-in-the-nation system fleeces those without pull to pay rich subsidies to well-connected politicians and corporations. Better to throw out the crony subsidies and lower rates for the rest of us — like The Tax Update’s Quick and Dirty Tax Reform Plan would do.

Again, I think the corporate income tax is on the way out. But that’s a long-term problem. It doesn’t mean we should throw in the towel right away. The corporate tax may, as McArdle suggests, be an “insane, unwinnable chess game” pitting lawyers against tax collectors. But for the time being, the game is still worth the candle.

I think Megan McArdle has the better case, that the corporation income tax needs to go away, one way or the other. I like the idea of doing so via a corporation dividends-paid deduction, combined with an excise tax on dividends for otherwise-exempt stockholders, as a way to get there.

If the IRS demanded your emails, and you said the computer “crashed” and ate them, they’d buy that, right?

The IRS expects us to believe that they so monumentally incompetent at information technology that they can’t produce Lois Lerner’s emails from January 2009 through April 2011. No backups? No RAID duplication? No way to reconstruct them out of the bad hard drive?

Even the best possible interpretation of this — taking the IRS at its word — is a damning indictment of the agency. It would show that basic network hygiene used by the private sector since the last century still is too advanced for the biggest taxing agency in the world.

But you may be excused for suspecting evil instead of incompetence here. Congressional investigators have been looking for these emails for months. Evidence has been building of an interagency effort between the IRS and the Justice Department to shut down, and even prosecute, unfriendly organizations. Now, suddenly, poof, no more emails. I don’t buy it.

The IRS statement says “In the course of collecting and producing Ms. Lerner’s additional emails, the IRS determined her hard drive crashed in 2011.” What email system does the IRS use where the emails live on individual hard drives, rather than an email server? Do any of you readers use your PC as your email server? If so, do you never back it up?

And if you buy the IRS story, then tell my why on earth this exceptionally inept agency should be responsible for administering the nation’s health insurance system through the ACA. Or even the income tax, for that matter.

Please provide a timeline of the crash and documentation covering when it was first discovered and by whom; when, how and by whom it was learned that materials were lost; the official documentation reporting the crash and federal data loss; documentation reflecting all attempts to recover the materials; and the remediation records documenting the fix. This material should include the names of all officials and technicians involved, as well as all internal communications about the matter.

Please provide all documents and emails that refer to the crash from the time that it happened through the IRS’ disclosure to Congress Friday that it had occurred.

Please provide the documents that show the computer crash and lost data were appropriately reported to the required entities including any contractor servicing the IRS. If the incident was not reported, please explain why.

Please provide a list summarizing what other data was irretrievably lost in the computer crash. If the loss involved any personal data, was the loss disclosed to those impacted? If not, why?

Please provide documentation reflecting any security analyses done to assess the impact of the crash and lost materials. If such analyses were not performed, why not?

Please provide documentation showing the steps taken to recover the material, and the names of all technicians who attempted the recovery.

Please explain why redundancies required for federal systems were either not used or were not effective in restoring the lost materials, and provide documentation showing how this shortfall has been remediated.

Please provide any documents reflecting an investigation into how the crash resulted in the irretrievable loss of federal data and what factors were found to be responsible for the existence of this situation.

For a phony scandal, it’s amazing how real they’re making it look.

Lois Lerner, ex-IRS, ex-FEC

Other Coverage:

Russ Fox, The Two Year Gap. “Either the IRS is deliberately lying or they have the worst IT department and policies of any company, organization, or government entity in the world.”

The IRS does not like the concept of “personal goodwill”, but courts have often approved it. In the Tax Court decision in the case of Bross Trucking, the concept was confirmed again, helping to save the taxpayer from what appears to me to be a real overreach on the part of the IRS.

Howard Gleckman, The Strange Fruit of the House’s Bonus Depreciation Bill (TaxVox). “If I had read the bill more carefully, I would have noticed that while it applied to fruit that grows on trees and vines, it inexplicably excluded fruit that grows on bushes. As a blueberry lover, I am shocked and outraged.”

They’re still trying to increase Iowa’s gas tax, reports William Petroski of the Des Moines Register:

An Iowa House subcommittee voted 5-0 today to approve a 10-cent increase in the state’s gasoline tax, although the proposal still faces steep odds of winning final approval this session.

The bill, managed by Rep. Josh Byrnes, R-Osage, would raise the fuel tax by three cents the first year, an additional three cents and following year, and four cents the third year. When fully implemented, the tax increase would generate $230 million annually for city, county and state roads.

It’s always hard to increase taxes in an election year. There is a good argument that gas taxes are the way to pay for roads, and that Iowa’s tax needs updating, but so far Iowa’s road spending is in line with most other states, and the talk of a “crisis” isn’t convincing everyone.

McEowen, head of the Center for Agricultural Law and Taxation (CALT) at Iowa State University, says it is always possible the state might do something to clean up its tax code, but it appears unlikely this year.

“Frankly, I don’t think anything important is going to happen on taxes, not in this legislative session,” he says.

Paul Neiffer looks at the predictably expensive and absurd farm bill: How To Make an Extra $100 Per Acre! It brings to mind the old joke: “How did the farmer double his income? He bought a second mailbox.”

The sales tax has been a blessing and a curse. One of its great virtues is that it is collected by the vendor, which then remits it to the state. Neither the taxpayer nor the tax agency has much to do except pay and collect. The vendor does the work. The success of the sales tax for the last 90 years is largely attributable to vendor collection. But if the vendor doesn’t collect and remit the appropriate tax, it is liable for the amounts. The vendor will have to pay the unremitted tax and could face severe penalties and even criminal charges.

So if a vendor is unsure about the status of an item it’s selling, it will collect the tax. Better to collect and remit tax not owed than to face the consequences of a mistake.

David notes that online vendors will have to deal with many states, with very confusing rules, and that over-collection of sales taxes is the inevitable result. Not that the states mind.

Cara Griffith wonders, Are State Tax Authorities Hiding the Ball? (Tax Analysts Blog). “I’ve noticed an emerging trend in some state departments of revenue – a move toward secret law. In a time when transparency has become a buzzword, some revenue departments are doing what they can to avoid transparency.”

Since then, of course, the new “weaponized IRS” has, in fact, come to be seen as illegitimate by many more Americans. I suspect that, over time, this loss of moral legitimacy will cause many to base their tax strategies on what they think they can get away with, not on what they’re entitled to. And when they hear of someone being audited, many Americans will ask not “what did he do wrong?” but “who in government did he offend?”

This is particularly true since the Obama administration is currently changing IRS rules to muzzle Tea Partiers.

While I don’t think it’s that bad yet, it’s headed that way if things don’t change. And, as Glenn points out, it’s not changing:

Meanwhile, the person chosen to “investigate” the IRS’s targeting of Tea Party groups in 2010-2012 is Barbara Bosserman, a “long-time Obama campaign donor.” So the IRS’s credibility is in no danger of being rebuilt any time soon.

I think this is a terrible and shortsighted mistake by the Administration. So much of its agenda, especially Obamacare, depends on effective IRS administration, but as the recent budget agreement proved, the GOP isn’t going to fund the IRS when it thinks that’s the same as funding the opposition.

The USA Today piece makes broader points about the effect of the loss of faith in civil servants as apolitical technocrats; read the whole thing.

We need to eliminate the biases in the code against savings and investment, so individuals have the incentive to add back to the economy, and businesses have the capital to buy new machines, structures, and equipment – all the things that give workers the ability to be more productive and earn higher wages. And we need a tax code that is simple and understandable, so taxpayers know exactly what they pay and why.

Generally speaking, we found that the tax reform proposals in these drafts go in the wrong direction. Our modeling shows that they damage economic growth, hurt investment, and, in many instances, violate the principles of sound tax policy: simplicity, transparency, neutrality, and stability.

The post links to a point-by-point examination of the Baucus proposals.

This past year, much ado was made about the so-called “IRS-Gate” and concerns that the Obama administration may have used the agency to target Tea Party and other right wing groups. … [W]hat often is not stated during the Martin Luther King Holiday weekend is that King, early in his leadership of the Southern Christian Leadership Conference (SCLC), was routinely subjected to IRS audits of his individual accounts, SCLC accounts as well as accounts of his lawyers, first starting during the administration of President Dwight Eisenhower and continuing through the Kennedy administration.

If you audit me, I shall become more powerful than you can possibly imagine…

Here are my official updated odds on when we might know what the actual 2014 Section 179 amounts will be:

By Memorial Day 10 Billion to 1

By Labor Day 10 Million to 1

By the November Mid-Term elections 500 to 1

Between the November Mid-Term Elections and December 15, 2014 25 to 1

After December 15, 2014 and before January 1, 2015 1 to 1

After December 31, 2014 5 to 1

I give about 5 to 1 odds in favor of the current Sec. 179 deduction being extended to $500,000 for 2014, and I think that Paul is right that it is most likely to occur during the lame-duck session. I think odds are about 50-50 on an extension of 50% bonus depreciation. It’s too bad the Feds have closed Intrade, as this would be a betting market I would like to follow.

Their mistreatment of employees and squabbles over bills are the stuff of legend and left prosecutors rife with eager witnesses when it came time for trial.

Helmsley was just as arrogant about her taxes, famously telling her housekeeper: “We don’t pay taxes, only the little people pay taxes.” Helmsley participated in several schemes to avoid paying millions of dollar in income and sales taxes.

Sometimes that sort of thing comes back and bites you; read the post to see how it bit Helmsley.

A Des Moines Register report on the introduction of the new ownership of the Iowa Speedway in Newton tells us how things work in Iowa:

No one needed super sleuth Sherlock Holmes to figure out one of the first priorities of NASCAR as the new owners of Iowa Speedway introduced themselves Thursday during a press conference.

Three Iowa legislators were parked front and center in a reserved seating area. Multiple times during the news conference, officials thanked Sen. Bill Dotzler and Representatives Dan Kelley and Rob Taylor.

When the event sprinted toward its own finish line, only the trio with desks at the statehouse were publicly asked to jump on stage for a photo with new track president Jimmy Small.

The law, as it stands, requires Iowa-based ownership. So the spigot that delivers that sales tax benefit, which Dotzler estimates at about $4 million to date, is being shut off as NASCAR grabs the steering wheel.

Dotzler promised to reintroduce the measure when the legislative session roars to life on Jan. 13, adding that he would support extending it beyond the original end date of 2016.

Government by special favor. And who benefits? NASCAR is a private company owned by a very wealthy family — one that evidently knows how to play the connections game. Meanwhile the guy running the pizza joint, the real estate office, the implement dealership, he gets a horribly complicated Iowa tax system with high rates to pay for lots of loopholes for other people. He gets automatic penalties for every honest mistake made in attempting to comply with this byzantine system. But hey, NASCAR!

IRS: shoot first, let the Tax Court sort it out later. One of the most annoying features of exams in recent years is the IRS habit of imposing penalties on almost every underpayment, regardless of the cause or the taxpayers’ history of good compliance. It’s nice to see a case like one in the Tax Court yesterday that held the IRS went too far.

The taxpayer were a married couple with a 50-year unblemished compliance history. The wife’s employer switched from issuing paper W-2s to downloadable versions for 2010. She didn’t get the memo, if there was one, and left her wage income off the couple’s 1040. The IRS computers noticed and issued a notice and penalty; the taxpayers double-checked with their preparer and immediately paid the extra taxes, but they balked at the 20% underpayment penalty.

The Tax Court pointed out (all emphasis mine):

Petitioners regard their tax situation as fairly complex, as they receive income from multiple sources, including two subchapter S corporations that lease farmland out of State. Petitioners worry about their ability to prepare accurate tax returns; accordingly, for many years, including 2010, petitioners have hired a certified public accountant (C.P.A.) to assist them in the preparation of their returns.

Petitioners are aware of the importance of recordkeeping, and for many years they have maintained a system for keeping track of documents that will be needed to prepare their returns. Thus, when petitioners received in the mail a tax document such as a Form W-2, Wage and Tax Statement, Form 1098, Mortgage Interest Statement, Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., they would briefly review it and then place it in a dedicated tax file, along with other tax-relevant documents that they collected throughout the year. In February or March petitioners would meet with their C.P.A. and furnish him with their tax file. Once the return had been prepared, petitioners would again meet with the C.P.A. to review the return.

So the taxpayers had a pretty good system in place to ensure compliance. Yet the missing W-2 fell through the cracks — partly because their preparer thought the wife had retired.

Petitioners’ failure to notice the absence of a Form W-2 for Mrs. Andersen was an oversight on their part. However, the oversight was at least partially understandable given both the number of petitioners’ tax documents and the fact that Mrs. Andersen never received from either her employer or her employer’s payroll agent a paper copy of a Form W-2, something that she had previously received throughout her career. Nor had Mrs. Andersen received notification from either of those parties that the payroll agent had discontinued issuing Forms W-2 in paper form in favor of making electronic copies available on the Internet.

Petitioners also failed to notice, when they reviewed their return with Mr. Trader, that Mrs. Andersen’s wages were not included on line 7. But when, as part of the review process, petitioners and Mr. Trader compared the 2010 return with the 2009 return, the parties noted the similarity of the amounts of income and the absence of any anomaly, thereby suggesting that no error had occurred. Indeed, the difference between the amounts of income reported on petitioners’ 2010 and 2009 returns was less than $1,000, or two-thirds of one percent of their 2009 income, a difference that would not ordinarily give rise to any suspicion that income had not been fully reported.

So the mistake was one a reasonable human would make. But the IRS thinks no mistake is reasonable, apparently. Fortunately the Tax Court held otherwise:

Clearly, petitioners made a mistake. But we think it was an honest mistake and not of a type that should justify the imposition of the accuracy-related penalty. In short, we think that petitioners’ diligent efforts to keep track of their tax information, hiring a C.P.A. to prepare their tax return, reviewing their return with the C.P.A. when it was completed, and prompt payment of the deficiency upon receipt of the notice of deficiency, together with the other facts and circumstances discussed above, represent a good-faith attempt to assess their proper tax liability. Accordingly, we hold that petitioners have carried their burden with respect to the reasonable cause and good faith exception under section 6664(c)(1) and that petitioners are therefore not liable for the accuracy-related penalty under section 6662(a).

So: good records, full cooperation with a reliable preparer, and prompt payment of any underpaid taxes on discovery of the underpayment were key. It’s ridiculous that it took a trip to Tax Court to get what seems like the only appropriate and fair result. The IRS should stop being so trigger-happy with penalties. Maybe a sauce for the gander rule, where the IRS and IRS personnel are as liable for penalties on incorrect assessments as taxpayers are for those on underpayments, would get them to see reason.

They also break down taxes paid and spending received by income quintile. When looked at this way, the redistribution becomes very clear. According to their analysis, those in the lowest quintile received $22,000 in spending minus taxes. In contrast, taxes exceeded spending by $56,000 in the highest quintile.

Source: Congressional Budget Office

When private think tanks like the Tax Foundation issue this sort of report, people favoring higher taxes on “the rich” dismiss it. CBO numbers are harder to credibly attack as partisan.

Jeremy Scott, Will FATCA Ever Go Into Effect? (Tax Analysts Blog) “FATCA should be put into effect as soon as possible, and the administration should stop bending separation of powers rules by using delays to functionally repeal unpleasant parts of statutes.”

Um, no, was there one? Remember the Tax Reform Act of 1995? (Clint Stretch, Tax Analysts Blog) “What is certain is that the 1995 hope of creating a tax system that genuinely favors savings and investment is dead.”

Baucus aims at LIFO, depreciation. Senator Max Baucus has issued a tax reform proposal that slows depreciation and eliminates LIFO. While it is a long way from becoming law — and certainly won’t become law in its current form — it will help shape the next round of tax reform. Some key points:

-Depreciation for non-real estate assets would be computed not asset by assets, but in “pools,” with a set percentage of the amount of assets in each pool deducted during the year. If the pool goes negative with dispositions, income is recognized. There would be four “pools” with varying recovery percentages.

- Buildings would be depreciated under current rules, but over 43 years.

- The annual Section 179 limit would be $1 million, but with a phaseout starting at $2 million of assets placed in service.

- Research expenses would be capitalized and amortized over five years.

- LIFO would be repealed.

- Advertising costs would only be half deductible currently with the rest amortized over 5 years.

- Farmers would lose their exemption from accrual-basis accounting.

I think this goes the wrong way, adding complexity and lengthening lives. I would prefer more immediate expensing. LIFO repeal, and maybe the farm rule, are the only proposals that seem to actually simplify anything. The rest seem like high-toned revenue grabs. If the revenue all goes to reduce rates, that wouldn’t be so bad, but I doubt that’s the idea.

The Baucus proposal aims to make the tax system match economic reality, removing the tax distortions from the equation. It would group tangible assets into just four different pools, with a fixed percentage of cost recovery applied to the tax basis of each pool each year, ranging from 38 percent for short-lived assets to 5 percent for certain long-lived assets.

…

It would be hard to make the case for giving the priority to tangible assets, and yet that is precisely what current law does by allowing rapid depreciation. At a minimum, the tax depreciation system should strive for neutrality and not discourage investment in intangibles and human capital.

That’s true. Yet it’s hard to see how the Baucus proposal to require R&D costs to be amortized over five years, or the proposal to require 20-year amortization of intangibles instead of the current 15 years, encourages investments in intangibles and human capital.

St. Louis loses another preparer. From a Department of Justice Press Release:

A federal district judge in St. Louis has permanently barred defendants Joseph Burns, Joseph Thomas and International Tax Service Inc. from preparing federal tax returns for others, the Justice Department announced today…

According to the complaint, the defendants repeatedly fabricated expenses and deductions on customers’ returns and falsely claimed head of household status for customers who were married in order to illegally understate their customers’ federal tax liabilities and to obtain fraudulent tax refunds. The complaint also alleged that the defendants falsely claimed that some of their customers earned income from businesses that the defendants fabricated or increased the amount of business income their customers earned in order to illegally claim the maximum earned income tax credit on customers’ returns.

The IRS has certainly given their clients’ returns a good going over. That’s the risk of going with a preparer whose results are too good to be true.

The ISU Farm and Urban Tax School is in Waterloo, Iowa today for another sold-out session. Only Red Oak, Denison and Ames after this, so register now! Then I drive to Cedar Rapids to talk about the Net Investment Income Tax and how it affects trusts before heading home tonight. Coffee vendors all over Iowa will have a good day today.

Today seems like a different kind of Waterloo for IRS — their web site is down this morning.

In order to claim the Credit, a 2013 Return must be filed by October 31, 2014, which is the extended due date. To avoid penalty, Iowa income tax returns normally must be filed by and 90% of any tax owed must be paid by April 30. The Credit will be applied to the computed Iowa tax after first applying any other refundable and nonrefundable tax credits. Any amount of the Credit that is in excess of the tax due is not refundable and cannot be carried back or carried forward to another tax year.

The $54 Credit amount and additional information will be reflected in the IA 1040 instructions for the 2013 tax year.

For all farms since 2007, the percentage of Section 179 to total depreciation averaged about 70% and in 2012 the number was slightly over 75%. For purchases over $100,000 the percentages has been even higher. Based on this table, it appears that most farmers have just about fully depreciated their farm equipment purchases over the last few years using Section 179.

Section 179 limits are slated by law to fall to $25,000 next year. I think it’s likely that Congress will eventually extend the $500,000 limit currently in effect to 2014, but it will make a big difference if they don’t.

It turns out that the “Midco” intermediaries were relying on variations of what Joe Kristan calls the Tax Fairy – the magical sprite that can make your taxes go away with fancy tax footwork. Of course as someone who just sold their corporation to someone, that’s not your problem – or so you would like to think. The IRS has been thinking otherwise. Since the corporations that have been sold are dry husks by the time taxes are assessed the IRS has been asserting transferee liability against selling shareholders. Results have been mixed.

been indicted for, among other things, filing liens against the IRS Commissioner. Everyone knows that you can’t just file baseless liens.

Only they can do that.

TaxGrrrlreports on a Michigan couple whose bank account was emptied by the IRS when they suspected they were “structuring” bank deposits to stay below the $10,000 disclosure limit. She takes up the story:

Instead, they insist that the deposits were generally less than $10,000 because their insurance policy covers the theft of cash only up to that sum. As a result, they do not let their employees carry more than that amount at any time, including walking deposits to the local bank.

That didn’t stop the feds from seizing the Dehkos’ remaining funds. Using a process called civil forfeiture, the federal government can seize assets on the basis of suspicion: there is no requirement for firm evidence nor are the property owners entitled to notice. The government didn’t ask the Dehkos about their deposits or they would have found out about the insurance policy.

Months after the seizure, prosecutors had never offered any evidence to prove that the Dehkos were engaged in money laundering or that they were avoiding income tax. In fact, a Bank Secrecy Act examination from last year resulted in a notice stating that “no violations were identified.”

Fortunately, the Institute for Justice stepped up and financed court action by the Dehkos, who run a grocery store in Michigan. The IRS has said it will return their funds. But unlike the California couple who went after the Commissioner, nobody at the IRS will ever be disciplined for slapping a lien on the Michigan grocers and seizing their cash, with no due process and, admittedly, for nothing. This sort of thing will continue until there is a Sauce for the Gander Rule, where taxpayers can sue IRS officials who make baseless filings on the same basis the IRS can sue taxpayers.

Well, it’s sunny indoors at Northwest Iowa Community College, where I am participating in the Sheldon Session of the ISU Center for Agricultural Law and Taxation Farm and Urban Tax School. I’m the “urban” part. Seats at the remaining schools are going fast, so register today!

According to the affidavit, posted on Al Jazeera’s website, [State Senator Ronald] Calderon [D-Montebello] allegedly accepted $60,000 in bribes from an undercover FBI agent posing as a movie executive and $28,000 more from a medical company owner in exchange for efforts to affect legislation on tax credits for the film industry and on workers’ compensation claims.

That tells you that California is a little more sophisticated than Iowa. The California guy (allegedly) required money to deliver the keys to the treasury to the film industry. All the Iowa legislature required was a few autographs and photo-ops with starlets. Iowa has learned from its mistakes, a little, and now favors jailing filmmakers to subsidizing them.

Robert D. Flach, I HATE K-1s! Robert adds what I will call Flach’s Iron Law: “All K-1s usually arrive late.” He then proceeds into a fine rant:

While I have not done any specific calculations, I firmly believe thatoften the additional costs to properly prepare the federal and state income tax returns for taxpayers with K-1 investments is as much as or more than the actual income, or tax benefits if any, generated from the investment. If the money invested in these limited partnerships were instead invested in related mutual funds I expect the investor would do better. His/her tax preparation costs would certainly be less.

Of course brokers never tell their clients this when selling them the investment.

While K-1s from closely-held businesses are normal and healthy, Robert is exactly right about the kinds of K-1s often seen in investment accounts.

“This scheme was based on a nonsensical formula that any honest person would instantly recognize was patently absurd and fraudulent,” U.S. Attorney Tammy Dickinson said in a statement. “Fortunately, the vast majority of these refund claims were detected by the IRS and denied.”

They need a new term for somebody who organizes a really dumb crime. Disastermaster? Blunderbrain? Any ideas are welcome in the comments.

Kyle Orton’s old lawyer fails to find the Tax Fairy, departs the tax business. From a Department of Justice press release:

A federal court has permanently barred Gary J. Stern from promoting tax fraud schemes and from preparing related tax returns, the Justice Department announced today. The civil injunction order, to which Stern consented without admitting the allegations against him, was entered by Judge Robert Gettleman of the U.S. District Court for the Northern District of Illinois. The order permanently bars Stern from preparing various types of tax returns for individuals, estates and trusts, partnerships or corporations (IRS Forms 1040, 1041, 1065, and 1120), among others.

…

According to the complaint, Stern designed at least three tax-fraud schemes that helped hundreds of customers falsely claim over $16 million in improper tax credits and avoid paying income tax on at least $3.4 million. Stern allegedly promoted the schemes to customers, colleagues, and business associates. The complaint alleges that his customers included lawyers, entrepreneurs and professional football players, and some of the latter, including NFL quarterback Kyle Orton, have sued Stern in connection with the tax scheme, alleging fraud, breach of fiduciary duty and professional malpractice.

Mr. Stern seems to have led his clients on a merry chase after the Tax Fairy, the legendary sprite who can wave her wand and make your taxes disappear. Kyle Orton is a graduate of Southeast Polk High School near Des Moines, where the truth about the Tax Fairy apparently was not in the syllabus.

The Internal Revenue Service sent 655 tax refunds to a single address in Kaunas, Lithuania — failing to recognize that the refunds were likely part of an identity theft scheme. Another 343 tax refunds went to a single address in Shanghai, China.

Thousands more potentially fraudulent refunds — totaling millions of dollars — went to places in Bulgaria, Ireland and Canada in 2011.

In all, a report from the Treasury Inspector General for Tax Administration today found 1.5 million potentially fraudulent tax returns that went undetected by the IRS, costing taxpayers $3.2 billion.

When your controls don’t notice something like that, you have a lot more urgent problems than regulating preparers. Yet Congress and the Administration think the IRS is ready to take on overseeing your health insurance purchases. What could go wrong?

Democrats seeking to raise revenue in ongoing budget talks have circulated a list of tax preferences they would like to see eliminated, including a provision that allows some wealthy individuals to avoid large payroll taxes, the carried interest preference, and the tax break for expenses businesses incur when moving operations overseas.

The “provision that allows some wealthy individuals to avoid large payroll taxes” is called Subchapter S. Form 1120-S K-1 income has never been subject to payroll or self-employment tax. This bothers the congresscritters (my emphasis):

Commonly known as the “Newt Gingrich/John Edwards” loophole, it is most often used by owners of Subchapter S corporations to avoid the 3.9% Medicare tax on earnings, which costs taxpayers hundreds of millions of dollars every year. Many S corporation shareholders receive both wages from the S corporation and a share of the S corporation’s profits, but they pay payroll tax only on their wages.

“Costs” taxpayers? From my point of view, and from that of my S corporation clients, it saves taxpayers hundreds of millions of dollars every year — but keeps it out of the hands of grasping politicians, so it’s perceived as a bad thing, by grasping politicians.

The versions of this “loophole closer” proposed in the past have been lame. When all they have to offer on tax policy is warmed over lameness like these, they aren’t serious.

The IRS can act in ways that violate both the letter and the intent of the tax law. Where such violations either provide benefits to select groups of taxpayers without directly harming others, or where the harm to taxpayers is de minimis, nobody has the ability or incentive to challenge the IRS and require it to enforce the tax law as written.

Congress could control the IRS’s abuse of the tax law. Using insights from the literature of administrative oversight, this Article proposes that Congress provide standing on third parties to challenge IRS actions. If properly designed and implemented, such “fire-alarm oversight” would permit oversight at a significantly lower cost than creating another oversight board. At the same time, it would be more effective at finding and responding to IRS abuse of the tax system and would generally preserve the IRS’s administrative discretion in deciding how to enforce the tax law.

Right now the IRS — and by extension the administration in power — can pick and choose what parts of the law it wants to apply. For example, the current administration has chosen to allow tax credits for participants in federal insurance exchanges, which the law does not authorize, while unilaterally delaying the employer insurance mandate but not the individual mandate. Somebody should be able to challenge this sort of fiat government.

Mr. Schiff appealed his sentence on tax crimes on the basis that his attorney failed to raise a “bipolar disorder” defense and what an attorney I know calls the “good faith fraud” defense — the Cheek argument that you really thought the wacky stuff you were saying is true. Peter wisely notes:

The problem with the Cheek defense is that you have to be smart to raise it, but if you show that you are too smart, then it does not work.

Its a fine line — smart enough to spend “thousands of hours” researching the tax law, but not smart enough to avoid a massive misunderstanding of it.

Not strictly tax-related, but good reading anyway: How to Put the Brakes on Consumers’ Debt. (Megan McArdle). Megan points out the wisdom of spending less than you take in, in preference to trying to get the government to cover your shortfalls.

Relief for the traveling employee? Tax Analysts reports ($link) that the “Mobile Workforce State Income Tax Simplification Act of 2013″ (S. 1645) was introduced yesterday. The bill would make the tax lives of employers and employees who cross state lines much easier by preventing states from taxing folks, other than athletes and entertainers, who are in a state for less than 30 days. From the Tax Analysts:

The bill is “a modernization of everything,” Maureen Riehl, vice president of government affairs for the Council On State Taxation, told Tax Analysts. It is “about supporting the mobility of an economy that has people moving around a lot more often than when the income tax laws went into effect in the states back in the ’30s and ’40s,” she said.

Who would oppose such sensible simplification?

The Federation of Tax Administrators does not share Riehl’s enthusiasm. Deputy Director Verenda Smith said the bill “does not strike an appropriate balance between administrative simplification and necessary tax policies.”

Smith took issue with the safe harbor provision, saying the 30-day threshold “is beyond a level necessary to deal with the vast majority of individuals who would be temporarily in a jurisdiction.”

The states want to tax you on their whim if you sneeze in their jurisdiction.

Still, they should have one more threshold: no state tax if you earn less than some threshold amount in a state, maybe $5,000. That way they can still pick LeBron’s pocket when he comes to town from his tax-free home in Florida, but a carload of struggling musicians couch-surfing from town to town would be saved the hassle of filing a tax return in every state where they have a gig — or more likely, saved the need to ignore the filing requirement.

If I ran a big corporation in Illinois, I would have my lobbyists asking for tax breaks daily. Why not? The tax incentive racket is a profit center for most corporations in Illinois. Is it blackmail? Sure. But it is cold, calculated, rational blackmail.

Paul Neiffer, Crop Insurance Deferral Options. “When a crop insurance claim relates directly to a drop in price, those claims cannot be deferred to the next year.” Paul explains what the choices are if the recovery relates to a yield loss.

Plenty of people did get hit in 2009, including people at the very top. But all things are relative. The fortunate 400 people with the highest adjusted gross incomes still made, on average, $202 million each in 2009, according to Internal Revenue Service data. And this doesn’t even count income that doesn’t show up as adjusted gross income, such as tax-exempt interest.

Yet the top 400 paid an average federal income tax rate of less than 20 percent, far lower than the top rate of 35 percent then in effect.

They also paid a lower rate than the top 1 percent, which were people with adjusted gross incomes in 2009 of at least $344,000. These affluent but hardly superrich taxpayers paid on average just over 24 percent of their adjusted gross income in federal income tax. Even the top 0.01 percent, people earning at least $1.4 million, paid 24 percent.

You’d get the impression that this is the same top 400 every year, paying low taxes as they go. That’s a wrong impression.

Most people who have spectacular incomes do so only once, usually because they sell their business or take it public. That normally is how you hit that top 400. Yet the “never a bad year” line implies that they have this kind of income year after year.

That income is capital gains, which are taxed at a lower rate. That’s no mystery or conspiracy, that’s just math.

Furthermore, those capital gains are often one of two taxes on the income. C corporation income is taxed twice — first on the corporation tax return, and again when retained earnings are distributed as dividends or recovered as capital gains. And to the extent the capital gains reflect inflation, they are aren’t a tax on income at all; they are a confiscation of principal.

Mr. Stewart is rehashing numbers from 2009, when the top federal rate on capital gains was 15%. It was increased for 2013 to 23.8%, nearly a 60% increase. Yet because ordinary income rates went up too, the Famous 400 will always have lower rates, and Mr. Stewart will be able to write the same lame column five years from now.

The IRS has figured out a way to make audits even more fun! Tax Analysts reports ($link) “The IRS Large Business and International Division on November 4 released mandatory, stringent new procedures for enforcing information document requests (IDRs) and issuing summonses, allowing examiners almost no discretion even at the manager level.”

The new procedure requires the IRS to issue a summons on a tight deadline when an “information document request” (IDR) isn’t promptly met:

If the IDR response remains incomplete by the delinquency notice deadline, the examiner is required — again without exception — to issue a pre-summons letter within 14 calendar days of the delinquency notice deadline. The pre-summons letter sets another new deadline, which can’t be more than 10 calendar days away unless the director of field operations grants approval.

Former IRS official Larry Langdon warns:

Taxpayers who may have trouble meeting proposed deadlines in a draft IDR “need to immediately escalate that draft IDR before it goes final, because in effect if it goes final, they’re stuck with those dates,” Langdon said. At that point, he added, no amount of negotiation will stop the new enforcement process from proceeding.

If you have 1,000 acres of good farmland, it only takes $250 per acre cash rent to put you over the threshold. Then, after a few years of cash renting, the farmer elects to sell his farmland. In this case, almost all of the gain will be both subject to the 3.8% net investment income tax and the 20% maximum federal tax plus state income taxes.

A California tax preparer decided he wanted to increase refunds for his clients. There’s absolutely nothing wrong with that–I want my clients to get the maximum possible refund allowed under the law. It appears that Kenyon Williams forgot those last three words; he was found guilty of two counts of wire fraud and two counts of aggravated identity theft earlier today.

While it might have secured a few convictions, and even jail time, in the KPMG and Daugerdas cases, it also lost face, along with time and resources, for its relatively modest success. Instead of spending many years to secure partial convictions on a few practitioners, perhaps the government’s time would be better spent attacking tax shelter transactions on the front end, at the exam and regulatory drafting levels.

If tax planning and compliance get you prosecuted, you’ll have a hard time getting people to perform tax planning and compliance.

Chilling effects. Tax Analysts story ($link) about last week’s conviction of tax shelter figure Paul Daugerdas, and the acquittal of the former chairman of BDO on related charges, has a sobering final paragraph:

Regarding Field, Edward M. Robbins Jr. of Hochman, Salkin, Rettig, Toscher & Perez PC noted the difficulty in obtaining an acquittal in the face of multiple tax-related conspiracy counts in federal court. “I looked at the . . . docket sheet for the entire case and wondered how much it cost Mr. Field for his acquittal,” Robbins said. “I’d say at least a couple of million dollars. That’s what it takes to beat a case like this at trial.”

It doesn’t help at all when the government freezes your assets before trial, as they did here. And if justice can only be had for $2 million, what chance does somebody have who lacks the the kind of wealth these defendants have?

The second thorny issue is that Hatch has decided to raise taxes significantly for the highest income groups. For people making between $250,000 and $1 million, the percentage increase is in the range of 33 percent to 45 percent. That’s a major sticker shock for high-income Iowans. That’s less than 5 percent of taxpayers. But even if it were 1 percent or less, Hatch loses the ability to argue that he won’t raise Iowans’ taxes.

Hatch says he’s trying to make Iowa’s income tax fairer, not just lower. The highest wage-earners are paying a lower percentage of their income, he said. His plan also increases the per-child deduction from $40 to $500 and gives married couples who are both employed a credit of $1,000.

That’s attractive, to be sure, but a plan that at least held higher-income Iowans harmless would have broader political appeal. The arguments about the wealthy paying their fair share just don’t resonate the same way during a time of budget surpluses as they do on the national level in the face of enormous debt.

Of course, a tax on “the rich” means a tax on “business.” A 33 to 45 percent increase on taxes on Iowa businesses doesn’t promise much in the way of either “fairness” or employment growth in Iowa.

Despite conventional wisdom that the Bush-era tax cuts disproportionately benefited the wealthy, the reality is that the tax burden on the bottom 99 percent has been falling for more than two decades. Indeed, the average tax rate for the bottom 99 percent of taxpayers is now below 10 percent—well below the average for all taxpayers—thanks to years of targeted tax cuts aimed at the middle class. Meanwhile, the top 1 percent of taxpayers still pays an effective tax rate that is roughly twice the average for all taxpayers.

But politicians insist that raising taxes on “the rich” is always somehow “fairness.”

Remember that Section 179 is allowed for new AND used equipment, while bonus is only on NEW equipment. You cannot take Section 179 on trade-in basis of old equipment, but can use it for bonus. Section 179 applies to farm equipment and single purpose farm structures and land improvements. Bonus applies to all farm assets including buildings.

I give about a 60% chance of 2013 bonus depreciation being extended into 2014, and about 80% on Sec. 179. For planning purposes, though, it’s wise to try to get the assets in service in 2013 if you can.

I’m hoping that I get some commenters who tell me that they keep meticulous track of all AMT carryovers for their clients and do a detailed reconstruction whenever they take on a new client. I bet they floss regularly too.

Guilty again. Former Jenkens and Gilchrist tax shelter wizard Paul Daugerdas was again convicted on tax crime charges yesterday arising out of the great tax shelter frenzy of the Clinton and Bush II years. A previous conviction was overturned on grounds of juror misconduct. Bloomberg Businessweek reports that he was convicted on seven of 16 counts.

A co-defendant, former BDO Seidman CEO Denis Field, was acquitted.

Mr. Daugerdas built a fortune around tax shelters with clever names like “HOMER,” “CARDs” and “BLISS.” The shelters typically involved offsetting investment positions, with losses allocated to shelter customers and gains allocated to tax-indifferent offshore entities. The shelters have fared poorly on exam and in the courts, with a nearly unbroken record of failure in litigated cases.

Mr. Daugerdas built a fortune around selling access to the Tax Fairy, the magical sprite who waves her wand to make tax problems go away. The news that there is no tax fairy proved costly to his clients, and probably also to him.

Clunk. Cash for Clunkers was an expensive boondoggle, reports the Brookings Institution. The study estimates that the program cost $1.4 million per “job created” while destroying thousands of perfectly good vehicles and raising transportation costs for those who rely on used cars.

Going Concern, Career Conundrum: Is a Master’s Degree Worth It? It’s all relative. To me it was, because my it was in Accounting, while my B.A. was in History — a noble field, but one with grim employment prospects. If you have an undergrad degree, I’m not so sure it’s worth forgoing a year or two of salary. If you don’t have a job anyway, it may be the edge you need.

Adam Chodorow, however, has an idea of how to ease such tax correspondence induced panic attacks.

Chodorow, a professor at Arizona State’s Sandra Day O’Connor College of Law, suggests color-coding so that taxpayers will immediately know the amount of tax trouble they are in. This, he says, could abate taxpayer stress.

If the IRS could be relied on to issue accurate notices, that would be lovely, but incorrect “red” notices would probably induce a rash of taxpayer heart episodes.

Hatch’s plan would get rid of federal deductibility, which allows taxpayers to deduct federal taxes from their state return. His plan would also raise filing thresholds. It would raise the per-child tax credit from $40 to $500. Married couples who are both employed would get a new $1,000 a year tax credit.

And Iowa’s eight rates and brackets, which range from 0.36 percent to 8.98 percent, would be reduced to four.

The top rate would fall slightly to 8.8 percent, although the income at which that rate begins would be raised by 26 percent, according to an analysis of Hatch’s plan by the nonpartisan Legislative Services Agency. The lowest rate would be 3 percent.

Taxes would go up for Iowans who make an adjusted gross income above $200,000, the Legislative Services Agency analysis says. The wealthiest taxpayers would see a small drop in the highest marginal tax rate, but their taxes would go up because they’d lose federal deductibility.

There are two things I hate about this plan and the way it is covered. First, it makes no mention that a tax on “the wealthy” is really a tax on business. Most business income is now reported on individual returns:

Source: The Tax Foundation

And 72% of that is reported by taxpayers with AGI over $200,000:

Cutting through the soak-the-rich stuff, what he’s really proposing is a great big tax increase on business. How that helps Iowa’s economy isn’t explained — I suppose because it doesn’t.

The other part I hate is the whole idea that hurting “the rich” on behalf of “the middle class” is presumed to be just fine. Heck, let’s go shoplifting at Wal-Mart, they have plenty of money — and it’s for the middle class!

States are increasingly turning to independent tax tribunals. Most states now have either a judicial-branch tax court or an administrative-level tax tribunal that is independent of the state’s tax authority. Taxpayers and practitioners have pressed states for independent decision-making bodies for several reasons, including that the judges or administrative law judges who write decisions are impartial and knowledgeable in tax issues and that the opinions should more consistently and transparently apply the tax law because they will be published.

Iowa, unfortunately, has only administrative tribunals and regular courts. The judges know little about taxes, especially income taxes, and tend to defer to the State, even when it tortures law and logic.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

TaxProf, NY Times: The Marginal Tax Rate Mess. Even the New York Times is noticing the high implicit marginal tax rates on means-tested welfare programs, like the earned income tax credit:

As a result of losing eligibility for means-tested benefits, low-income and middle-income families sometimes experience much higher marginal effective tax rates (sometimes exceeding 90 percent) than those at the top of the income distribution. Phase-outs for any one program may not be large, but participation in several programs creates a cumulative effect.

Andrew Lundeen, Scott Hodge, The Income Tax Code Is More Progressive than It Was 20 Years Ago (Tax policy Blog). “The top 1 percent of taxpayers pay a greater share of the income tax burden than the bottom 90 percent combined, which totals more than 120 million taxpayers. In 2010, the top 1 percent of taxpayers—which totals roughly 1.4 million taxpayers—paid about 37 percent of all income taxes.”

Stop by for treats tonight. You can find us by Son’s MST3K-themed pumpkin.

The Des Moines area has an unusual tradition for trick-or-treating on October 30, rather than October 31. On our “Beggars Night,” it’s customary for the little monsters to tell a joke. A perennial favorite:

What’s a pirate’s favorite restaurant?

Aaaarghh-bys!

So drive carefully tonight!

Speaking of scary, think of having your IRA disqualified and taxed currently, with penalties, for engaging in a prohibited transaction. That’s what happened to a Missouri man in Tax Court yesterday.

The taxpayer, a Mr. Ellis, rolled $320,000 out of his 401(k) and put it into a self-directed IRA. The IRA than bought 98% of a corporation (an LLC that elected to be taxed as a corporation) to open a used-car lot, where he began working as the general manager. It went badly. From the Tax Court opinion:

In essence, Mr. Ellis formulated a plan in which he would use his retirement savings as startup capital for a used car business. Mr. Ellis would operate this business and use it as his primary source of income by paying himself compensation for his role in its day-to-day operation. Mr. Ellis effected this plan by establishing the used car business as an investment of his IRA, attempting to preserve the integrity of the IRA as a qualified retirement plan. However, this is precisely the kind of self-dealing that section 4975 was enacted to prevent.

The result? $163,000 of taxes and penalties on the $320,000 invested in the used car lot — which, of course, may well not be very liquid, seeing that it’s all invested in a closely-held corporation.

My opinion of the distribution of likely outcomes is that it is bimodal. There is a high probability that the exchanges will be working at the end of November. I think that there is an even higher probability that they will be working never.

The public pledge where the new savior of the site impresses Mr. Kling, but he thinks the design issues might be intractable.

About half of the nation’s income is reported by taxpayers who make less than $100,000, and half is reported by taxpayers who make more. However, taxpayers who make less than $100,000 collectively pay just 18 percent of all income taxes while those who make more pay over 80 percent of all income taxes.

Both parties should also give serious thought to greater reliance on the property tax. Yes, I know people hate that tax. I also know that politicians find it advantageous to attack it. But the property tax revolts of the late 1970s and the 1980s have badly damaged the fiscal structure of state and local governments.

Tax reform? Don’t bet on it. Not this year, and probably not next year either. Tax reform, like everything else in Washington, is on hold pending the resolution of a broader, highly polarized debate about the role of government in American society.

37-yard month penalty for former Eagle Mitchell. The sentence was handed down yesterday in a Florida federal courtroom, reports the Orlando Sentinel.

The former NFL wide-receiver blamed brain injuries suffered on the field after pleading guilty to a plot where he helped convince Milwaukee Bucks player to use a Florida preparer to file a refund claim, which would be split between the NBA player, Mr. Mitchell, and the preparer. The claim was fraudulent, and the NBA player wasn’t charged. Mr. Mitchell also allegedly used an LLC to conceal other fraudulent tax claims. Brain injuries are funny things.